States poaching businesses from other states

Jun. 28, 2014
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GOP governors, including Indiana Gov. Mike Pence and Texas Gov. Rick Perry, have made aggressive efforts to tout what they say are their states' business-friendly environments. Indiana has even bought billboards in the Chicagoland area to try to lure Illinois businesses to the Hoosier state. / Aamer Madhani/USA TODAY

by Aamer Madhani, USA TODAY

by Aamer Madhani, USA TODAY

It's a slap at the Land of Lincoln's economic and financial policies. The advertiser? Neighboring Indiana, calling itself "A State that Works."

Indiana is aggressively trying to poach businesses from Illinois - a controversial economic development strategy that several other states also are employing in the battle for jobs and revenue.

The dynamic playing out here is one that is being embraced by Republican governors across the country who are aggressively courting businesses in higher-tax states such as Illinois, California, Connecticut, Massachusetts, Missouri and New York - all states with Democratic governors.

Leading the charge are Mike Pence in Indiana and Rick Perry in Texas, who both are pondering runs for the White House in 2016.

"We like to use the word 'hunt,'" said Victor Smith, Indiana's secretary of commerce, who spent part of last week in California talking up Indiana to businesses there. "There are a handful of states that have substantial policy challenges. Those companies in those areas don't like the unpredictable nature of their future, and that's what's driving this. The great thing we can offer in Indiana is predictability."

Indiana says it has won over 40 Illinois companies since 2011 that have moved or are in the process of moving or expanding their operations in Indiana. Those companies will create 3,600 new jobs in Indiana and make $424 million in capital investment.

Officials in Illinois, however, say state-to-state business migration has essentially been a wash. A study by a coalition of Illinois businesses found that the state in 2012 had a small gain in employment because of relocation, while slightly more businesses left the state than migrated to it.

In a head-to-head comparison with Indiana, the Hoosier state saw three more companies relocate to their state than it lost to its western neighbor, but Illinois had a net gain in jobs as a result of the business migration between the two states.

At a recent forum in Chicago, Adam Pollet, director of the Illinois Department of Commerce and Economic Opportunity, said states are better off focusing on how they will help develop entrepreneurs than on relocation - an argument echoed by some tax-policy experts and economists.

"Companies are going to move for a variety of reasons - sometimes we can have a role in those outcomes, sometimes not," said Dave Roeder, a spokesman for the Illinois Department of Commerce and Economic Opportunity. "We're trying to remain focused on what we can do well here to be an attraction for private investment. In our case, that tends to come down to this being a great place that talent wants to be. And what's coming in the economy is going to be a race for talent."

"These efforts by states at job poaching from other states reflect a complete lack of understanding as to where job creation really comes from," said Michael Mazerov, a tax-policy expert at the Center on Budget and Policy Priorities in Washington. "What distinguishes one state from another in success in creating jobs is its ability to stimulate entrepreneurship and to make sure that those fast-growing businesses ... actually succeed at what they are doing."

In Indiana, the effort to target Illinois and other higher-tax states began in earnest in 2011 under then-Gov. Mitch Daniels as the Illinois legislature, mired in debt and exploding pension costs, moved to raise individual income taxes.

Pence took up the cause and has made recruiting businesses from other states a calling card as speculation mounts over whether he will run for president.

Earlier this year, Pence successfully pushed for the Hoosier state to gradually lower its corporate tax rate to 4.9% - which would make it the third-lowest among the 44 states that levy a corporate income tax. By comparison, Illinois' corporate tax rate stands at 9.5%, and North Dakota has the lowest rate in 2014 at 4.53%.

Pence has taken a hands-on approach in the Indiana campaign. The governor has Smith give him weekly status updates on businesses Indiana has in the pipeline for targeting. The governor also has made a habit of using his time driving between appointments to call business owners to personally make the pitch - touting Indiana's tax rates, low wages and cost of living.

One businessman to receive a call from Pence was Bob McMurtry, president of the Illinois company Tec Air, whose company needed to expand to meet rising demand.

The designer and manufacturer of plastic air-movement components was courted by other states, including South Carolina, but ultimately decided he wanted to stay close to the Chicago area so it could maintain much of its skilled workforce.

Illinois and Indiana both offered tax credits against corporate income-tax liability in exchange for jobs and investments in the state. But Indiana also offered incentives for the training of new and existing employees as well as tax incentives to defer moving costs and the purchase of new equipment, McMurtry said.

"Even if we had equal cash incentives, there was still an overwhelming business-friendly environment that we don't enjoy in Illinois," said McMurtry, who is now relocating Tec Air to northwest Indiana. "Real estate taxes are significantly lower in Indiana, unemployment insurance is significantly lower in Indiana, and workers comp is significantly lower in Indiana."

Some businesses, however, have been turned off by the dangling of tax incentives by states. Lagunitas Brewing Company said it got plenty of tax-incentive offers when it began its search for a Midwest site to build a new brewery.

"I don't need it to do business here," said Tony Magee, the founder of the California craft beer maker that held a ribbon-cutting ceremony for its Chicago brewery earlier this month. "I'd rather they fill more potholes and have midnight basketball than give me taxpayers' money."

Perhaps even more aggressive than Pence on the relocation push has been Texas' Perry, who ran unsuccessfully for the White House in 2012 and is pondering another shot.

Perry, who boasts about his state's economic growth as the "Texas Miracle," has relished touting the Lone Star State as a place with "low taxes, fair courts, smart regulations and world-class workforce."

His office says it doesn't keep an exhaustive list of out-of-state businesses the governor has been able to persuade to either expand or relocate in Texas but offered a list of dozens of high-tech, manufacturing, medical and other industries that have decided to come to Texas. In his recruiting efforts, Perry hasn't shied away from digs or dramatic rhetoric to make his point.

In an advertising campaign that ran in Illinois last year, Perry said the business climate in Illinois was "not unlike a burning building on the verge of collapse."

And earlier this month in an opinion piece in the Orange County (Calif.) Register - which came just weeks after Toyota announced it would move its 4,000-employee sales headquarters from California to Texas - he wrote of his hope "that California will see the light when it comes to excessive taxation and regulation."